>> Monday, September 26, 2011

This article is written specially as a contribution to the CPF initiative “Are You Ready?”. The main aim of this year’s initiative is in 4 areas, namely Healthcare, Housing, Retirement and General Cash Flow Management.

In my opinion, Healthcare, financially is straightforward, having a suitable shield plan, minimally the compulsory opt-out CPF schemes of Medisave, MediShield and ElderShield provides reasonable coverage. More in-depth will be discussing the integrated Shield plan with the co-insurance/deductible cash riders, Power of Attorney and Advanced Medical Directive. On another hand, prevention is better than cure, maintaining a healthy lifestyle, balanced eating with regular exercise is still paramount to prevent incurring medical cost in the first place.

For Housing, Retirement and Cash Flow Management, I feel that Housing is a major factor directly impacting the other two. Why? Mortgage loan duration will affect when one can retire debt free and loan installments will form a huge regular expense of cash flow management. Therefore, by managing Housing Financial Planning, it will also manage areas of Retirement and Cash Flow. Further, I feel it is an often neglected topic as “Financial Planners” often only talk about insurance and “Property Directors” usually discuss property prices only.

The CPF campaign has provided a useful Checklist to avoid potential pitfalls and to buy a house within one’s means.

Checklist item 1: Have you saved enough?

Buying a property would most likely be the single most expensive purchase most Singaporeans will make it their life time. However, the irony is that they would have bought at quite an early stage in their careers when they have not even built up much wealth yet. In addition, it would also be at the same point in time they splurge on their once in a lifetime wedding and honeymoon.

How much is enough? Well, depending if it is a HDB or private property, new or resale, there is the down payment which can be partially off set with available CPF-OA. Then there are the stamp duties, legal fees and cash over valuation (COV) if necessary. After receiving the keys, there are renovation, furnishings, appliances, decorations, household necessities, etc. So, how much really depends on the quality and luxury of your lifestyle expectation. Although that said, minimally, it is expected to be in the five figure range.

This is of course over and above the emergency fund of at least 3 to 6 months of your income that you will have to first establish. It will now also have to be more due to the unforeseen events of household emergency maintenance and repairs.

Checklist item 2: Am I able to service my debt?

Cash Flow Management dictates, as a guide, the installment should be below 35% of one’s income. However, you must really break down to individual expenses to ensure the installment is comfortable to live within your means. No point locking away 35% of your income only to compromise on lifestyle and taking on other forms of credit card debt eventually. Neither is it wise to keep it below 35% if you earn more than sufficient to cover expenses and waste the excess savings in negligible return fixed deposits.

Most importantly, work with a budget percentage that is most comfortable and will not result in compromising the payment or taking on more debt in future to sustain your lifestyle. As the Chinese saying goes, do not wear a hat that is bigger than your head, it is better to moderate your expectations to a property that is more affordable rather than be a slave to servicing the loan. Perhaps consider HDB 3 rooms or 4 rooms instead of insisting on 5 rooms, Jumbo, EA, EM, EC, or maybe cheaper locations compared to higher priced centrally located units.

Interest rate environment is low at the moment and if you are taking a floating rate mortgage loan, you need to prepare sufficient buffer for the increase in future. Even if yours is a fixed package from HDB, it is now guaranteed at 2.6%, but it is pegged to CPF rate of 2.5% + 0.1% which could increase once the government allows it to float based on government bond rates.

Checklist item 3&4: How long should my loan duration be?

It depends on when you wish to retire debt free and your comfort level of debt servicing. If you are using CPF to pay for the loan, then 55 would be a good alignment not to stretch it any further. Retiring does not necessarily mean stop working, it means to have a choice to retire if you wish too as you are debt free and have sufficient funds to live on. The property can also be pledged for achieving the CPF Minimum Sum Scheme, so more reason that it would be best to work within age 55 for the loan duration.

In addition, if you are using CPF, the contribution rates vary has you get older, so the mortgage installment being a constant amount may require cash top up in later years. There are also imposed restrictions on the withdrawal limits for housing, which may result in the remaining amount of the loan having to be serviced in cash.

Checklist item 5: Is insurance necessary?

If you have loved ones under the same roof, would you want them to take over your portion of the property debt burden if you are no longer around?

For HDB financed using CPF, the Home Protection Scheme (HPS) is compulsory. However, this only covers the mortgage, it is also ideal to add on and insure the house and its contents for a reasonable insurance premium.

In fact, this scheme and most other mortgage insurance cover only upon death or total permanent disability (TPD). It is not a living insurance, which means that if one contracts critical illness (CI) or disability, one may not be able to work but the installment is still required to be paid. So, do consider other types of insurance like CI or disability income plans to compliment the mortgage loan coverage.

In summary, all these items are the bare essentials that will apply in general to prepare to be ready. It provides a good head start as a checklist on issues you have to look out for but may have left out. For more in-depth analysis, it includes understanding those items in detail and other areas like:
- Various HDB schemes, BTO, DBSS, EC, HUDC, resale
- Private properties that are freehold, leasehold 999 years, 99 years
- Mortgage loan packages, bank or HDB, SIBOR or SOR rates, fixed or floating, interest offset, etc
- Maximum or minimum loan with maximum or minimum duration
- When to buy the property
- Estate planning of properties

*** ***
Are You Ready? is a new proactive outreach initiative by CPF Board which aims to educate Singaporeans on how to make key financial decisions in their lives. This year, we will be focusing on 4 key areas, namely Healthcare, Housing, Retirement and General Cash Flow Management.

To help users along, a checklist is devised for each key area as a quick guide to check how ready they are in making this decision. The checklist will be made available on both online and hard copy version.

3
comments:

Very comprehensive list for beginners who are starting out on their path to financial planning.

Saving is the first step, if not hampered by debts already. So get rid of credit card debts, gambling debts before we can get ready.

Then investments is another BIG topic, which will bring us to retirement. Before we can get ready for investments, beware that there are many people waiting to plunder you of your hard earned savings, promising you courses/software that will make you rich.

I am quite impressed with the campaigns rolled out so far. Even Malaysia is having financial planning campaigns. It's a good start for people without a clue to financial planning. Like you said, first get out of debt. Then start investing for the future.

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